1 At the time the complaint was filed, Party CityCorporation ("Party City Corp.") was also a defendant, however,plaintiffs reached a settlement with Party City Corp., and, onMay 3, 1996, Party City Corp. was dismissed from the lawsuit.

2 Party City stores sell party goods such as plates andnapkins. (Tr. 8/21/97 at 28.)

IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

JEFFREY McDERMOTT, : CIVIL ACTIONDONNA McDERMOTT, and : No. 95-3683THE McDERMOTT GROUP, INC., :

:Plaintiffs, :

:v. :

:PARTY CITY CORP. and :PHILIP NASUTI :

M E M O R A N D U M

EDUARDO C. ROBRENO, J. August 1,2003

Donna and Jeffrey McDermott, individually and on behalf

of the McDermott Group, Inc., (collectively "plaintiffs"),

initiated this lawsuit against defendant Philip Nasuti

("Nasuti"),1 asserting both contract and tort claims. Plaintiffs

alleged that Nasuti breached a stock purchase agreement, under

which Nasuti was to purchase stock in, and perform management

services for, the McDermott Group, Inc. ("the McDermott Group"),

a Pennsylvania corporation formed by the McDermotts for the sole

purpose of operating a Party City franchise store in King of

Prussia, Pennsylvania ("the store").2 Plaintiffs also contend

that Nasuti owed a fiduciary duty to the McDermott Group, arising

3 Specifically the jury found that Nasuti owed plaintiffs$118,980 attributed to the lease of the store, $71,400attributable to the loan by Royal Bank, $112,200 attributable tovendor debt, $56,409.49 attributable to Nasuti's failure to paycash for his share of the McDermott Group, $17,500 resulting fromthe McDermott's sale of mutual funds resulting from Nasuti'sbreach, and zero dollars attributable to lost future profits.

2

from Nasuti's position as manager of the McDermott Group store

and as an agent of the McDermotts. Plaintiffs claimed that

Nasuti breached this fiduciary duty by permitting the store to

fail, abandoning it, and usurping business opportunities to

benefit Nasuti's own ventures; and converted McDermott Group

property and McDermott Group employees' time for his own benefit.

Plaintiffs sought damages from Nasuti related to the liquidation

of the store as a result of Nasuti's alleged breach of contract

and tortious conduct, and also claimed punitive damages. Nasuti,

in turn, filed a counterclaim against the McDermott Group for an

accounting.

The case was tried before a jury, which rendered a

verdict in plaintiffs' favor on the contract claim for

$376,489.493 on the breach of fiduciary duty claim for $137,000,

and assessed punitive damages against Nasuti in the amount of

$375,000, for a total of $888,489.49. The jury, however, found

that plaintiffs had not proved that Nasuti converted the

McDermott Group's property. Finally, the jury found for the

plaintiffs on Nasuti's counterclaim.

Before the Court are Nasuti's post-trial motions

claiming various points of legal and trial error, and requesting

judgment as a matter of law, a new trial, or in the alternative,

4 Prior to signing the franchise agreement, on October18, 1993, the McDermotts had entered into a lease for the storeat a shopping center in King of Prussia.

3

remittitur, and plaintiff's motion to amend judgment to add

prejudgment interest. For the reasons stated herein, the Court

will grant in part Nasuti's motion for judgment as a matter of

law and deny it part, and will grant plaintiff's motion to amend

the judgment to add prejudgment interest. The Court will,

therefore, reduce the amount of compensatory damages by

$111,962.39, add prejudgment interest of $65,387.01, and will

enter an amended judgment in plaintiffs' favor in the amount of

$841,914.11. Nasuti’s motions for a new trial, or in the

alternative remittitur, will be denied.

I. FACTS

Donna and Jeffery McDermott decided to open a franchise

operation as a family business in 1992. After engaging in

extensive research they settled on a store that would sell party

goods. For the purposes of owning and operating the store, the

McDermotts formed the McDermott Group, of which they owned 100

percent of the stock. On November 23, 1993, the McDermott Group,

entered into a franchise agreement with Party City Corporation

("Party City Corp.") to operate a Party City franchise store in

King of Prussia, Pennsylvania.4

On February 4, 1994, the McDermott Group obtained a

loan ("the loan agreement") from Royal Bank for the amount of

$200,000 to finance the Party City franchise venture. The

5 Brand also serves as general manager of the PhilipDavid Company which at the time of trial owned and managedseveral Party City franchises.

6 The management and management fee provision of theagreement is contained in Exhibit B to the stock purchaseagreement, entitled "Shareholder Agreement." (Ex. P-2.)

4

McDermotts individually guaranteed the loan. The loan agreement

required, inter alia, that the McDermott Group obtain Royal

Bank's written consent prior to any change in the McDermott

Group's ownership or control.

The McDermott Group store opened on March 19, 1994. In

May 1994, Jeffery McDermott learned that he had been transferred

by his employer from the Philadelphia area to Arlington,

Virginia. Donna McDermott then discussed with Party City Corp.

selling all or part of the McDermott Group's assets to Party City

Corp. The negotiations did not prove fruitful. In early July

1994, the McDermotts began discussions with Nasuti, who at the

time was an owner of five other Party City franchises, and his

stepson, Michael Brand,5 to sell all or part of the store to

Nasuti. On August 30, 1994, Nasuti entered into a contract to

purchase 51 percent of McDermott Group stock ("the stock purchase

agreement") for $56,409.409. As part of the transaction,6 Nasuti

also agreed to undertake the management of the store. Under the

stock purchase agreement, Nasuti was to receive $5,000 per month

as a management fee for running the store and $700 per month for

office expenses. On August 31, 1994, immediately following the

signing of the stock purchase agreement, the McDermotts moved to

Virginia and Nasuti took over the management of the store.

7 The opening of the East Norriton store by Party CityCorp., however, technically conformed to a 3.0 mile limit imposedby the franchise agreement between Party City Corp. and theMcDermott Group. The franchise agreement provides:

The area granted pursuant to the terms of the franchiseagreement shall be a minimum of a three-mile radiusfrom the location indicated by attaching a map showingthe location and the radius to Exhibit A of thefranchise agreement.

Ex. P-1 at para. 12.6.

5

Under Nasuti's management, the store did not perform

as well as projected during the Halloween season, the most

important business season of the year. At the time, the

McDermotts and Nasuti concluded that the poor business

performance was due to a "cannibalization effect" caused by the

presence of another Party City store nearby in East Norriton,

Pennsylvania.7 As a result, in November 1994, Donna McDermott,

Nasuti, and officials from Party City Corp. began to discuss

moving the store to a new location in the hopes of improving its

performance.

In December 1994, at Nasuti's request, the McDermotts

inspected a site at the Northeast Shopping Center, located at

Roosevelt Boulevard and Welsh Road in Philadelphia, as a possible

new location for the store. Thereafter, the McDermotts agreed

to move the store to that location, and Party City Corp. approved

the new site. At the same time, however, and unbeknownst to the

McDermotts, Nasuti had been negotiating with Party City Corp. for

several sites for his own new franchises, including a site

located at the intersection of Cottman and Bustleton Boulevards,

which was approximately three miles from the Northeast Shopping

8 The parties dispute the actual distance between the twolocations. Nasuti claims that according to his calculation, thedistance between the stores exceeds three miles.

9 The parties dispute whether Party City demanded thatNasuti ask the McDermott's permission, or Nasuti contacted theMcDermott's upon counsel's suggestion and "as a courtesy."

10 In September 1995, following Nasuti's termination ofthe stock purchase agreement, he and Brand established a PartyCity franchise at the Cottman and Bustleton location.

11 According to the testimony of Daniel Gallagher, anofficer of Royal Bank, the Small Business Administration requiresthat anyone who owns more that 20 percent of a businesspersonally guarantee the loan. (Tr. 8/25/97 at 34.)

6

Center.8

In January 1995, Nasuti requested permission from the

McDermotts to open a Party City store under his own name at the

Cottman and Bustleton location.9 The McDermotts refused

permission to Nasuti to open a store at the Cottman and Bustleton

Boulevards location because they feared that its close proximity

to the Northeast Shopping Center would damage the McDermott Group

store's business. In fact, it was the proximity of another Party

City store which the parties suspected had eroded the business of

the store in King of Prussia.10

On February 9, 1995 a loan committee at Royal Bank

considered both the approval of the stock purchase agreement of

August 30, 1994 and the relocation of the store to the Northeast

Shopping Center. The committee approved the stock purchase and

the relocation with additional conditions, including that Nasuti

and his wife, Helene Nasuti, personally guarantee Royal Banks's

loan to the McDermott Group11 and that Nasuti's management fee be

12 The parties agree that Pennsylvania law controls inthis diversity case.

7

reduced to $4,000 per month.

In March 1995, and without prior notice to the

McDermotts, Nasuti instructed his attorney to "cancel the

contract", because, in Nasuti's opinion, the McDermott's had

breached their agreement by not investing adequate cash into the

operation of the store. On March 13, 1995, Nasuti's attorney

sent a letter to plaintiffs to that effect. The McDermotts

contend that because Nasuti abandoned the store and at the same

time also "impeded" the move of the store by planning to open his

own store within three miles of the new location, they were faced

with the choice of operating the store in King of Prussia or

liquidating it.

In light of these circumstances, the McDermotts decided

that the best option would be to liquidate the King of Prussia

store. To carry out the liquidation, the McDermotts hired

Stephen Cucinotti, an experienced liquidator. The store closed

in April 1995, upon completion of the liquidation process.

Shortly thereafter, Nasuti proceeded to open two other Party City

stores -- one at the Northeast Shopping Center site and another

at the Cottman and Bustleton Avenues site.

II. LEGAL STANDARD12

A. Judgement as a Matter of Law

In ruling on a motion for judgment as a matter of law

8

under Federal Rule of Civil Procedure 50(b), the evidence in the

case must be viewed in the light most favorable to the successful

party, and every reasonable inference therefrom must be drawn in

that party's favor. See Fineman v. Armstrong World Indus., Inc.,

980 F.2d 171, 190 (3d Cir. 1992); Fireman's Fund Ins. Co. v.

Videfreeze Corp., 540 F.2d 1171, 1178 (3d Cir. 1976) ("The trial

judge, in his review of the evidence, . . . must expose the

evidence to the strongest light favorable to the party against

whom the motion is made and give him the advantage of every fair

and reasonable inference"). It is impermissible to question the

credibility of witnesses, or to weigh conflicting evidence as

would a fact-finder. See Parkway Garage, Inc. v. City of

Philadelphia, 5 F.3d 685, 691 (3d Cir. 1993). Applying these

precepts, a jury verdict can be displaced by judgment as a matter

of law only if "the record is 'critically deficient of that

minimum quantum of evidence from which the jury might reasonably

afford relief.'" Dawson v. Chrysler Corp., 630 F.2d 950, 959 (3d

Cir. 1980) (quoting Denneny v. Siegel, 407 F.2d 433, 439 (3d Cir.

1969)), cert. denied, 450 U.S. 959 (1981).

B. New Trial

Similar concerns restrict the Court's discretion in

ordering a new trial pursuant to Federal Rule of Civil Procedure

59. "Such an action effects a denigration of the jury system and

to the extent that new trials are granted the judge takes over,

if he does not usurp, the prime function of the jury as the trier

of the facts." Lind v. Schenley Indus., Inc., 278 F.2d 79, 90

9

(3d Cir. 1960) (en banc). A new trial on the basis that the

verdict is against the weight of the evidence can be granted

"only where a miscarriage of justice would result if the verdict

were to stand." Klein v. Hollings, 992 F.2d 1285, 1290 (3d Cir.

1993). Where the proffered basis is trial error, "[t]he court's

inquiry . . . is twofold. It must first determine whether an

error was made in the course of the trial, and then must

determine whether that error was so prejudicial that refusal to

grant a new trial would be inconsistent with substantial

justice." Farra v. Stanley-Bostitch, Inc., 838 F. Supp. 1021,

1026 (E.D. Pa. 1993) (internal quotations omitted), aff'd without

op., 31 F.3d 1171 (3d Cir. 1994); see Fed. R. Civ. P. 61. An

error in jury instructions must be so substantial that, viewed in

light of the evidence in the case and the charge as a whole,

"'the instruction was capable of confusing and thereby misleading

the jury.'" Link v. Mercedes-Benz of N. Am., Inc., 788 F.2d 918,

922 (3d Cir. 1986) (quoting United States v. Fischbach & Moore,

Inc., 750 F.2d 1183, 1195 (3d Cir. 1984)).

C. Remittitur

Defendant argues, in the alternative, that the Court

should grant a remittitur in this case due to the excessiveness

of the damages awarded. Remittitur is appropriate if the Court

"finds that a decision of the jury is clearly unsupported and/or

excessive." Spence v. Board of Educ. of Christina Sch. Dist.,

806 F.2d 1198, 1201 (3d Cir. 1986); see 11 Charles A. Wright &

Arthur R. Miller, Federal Practice and Procedure: Civil § 2815

10

(1973). If remittitur is granted, the party against whom it is

entered can accept it or can proceed to a new trial on the issue

of damages.

III. DISCUSSION

A. Contract

1. Liability

Nasuti contends that he is entitled to judgment as a

matter of law on the issue of contract liability because the

evidence at trial did not support a finding that a condition

precedent to the contract was satisfied. Specifically, Nasuti

points to section 2.4(a) of the stock purchase agreement which

provides:

2.4 Conditions to Purchaser's Obligations. ThePurchaser's obligation to purchase two hundred fourshares shall be subject to the following conditions ator before closing hereunder:

(a) Royal Bank and the Small BusinessAdministration shall have consented to thetransactions described herein;

Ex. P-9 sec. 2.4. Nasuti argues that Royal Bank and the Small

Business Administration ("SBA") did not actually approve the

stock purchase agreement, and that this approval was required as

a condition precedent to the his obligation to perform under the

contract. Nasuti points to Royal Bank loan committee's minutes

of February 9, 1995 which addressed the McDermott Group's

"Request for Approval for the sale of 51% of the company and the

relocation of the store." (Ex. P-13.) According to the

minutes,"[t]he Committee approved the request with the following

13 The validity of the argument that Nasuti could defendagainst the enforcement of the stock purchase agreement on thebasis that a condition precedent was not fulfilled is doubtfulbecause, in this case, the condition ran to the benefit of RoyalBank, and not to Nasuti.

11

added conditions." Nasuti claims that the stock purchase

agreement was not valid until the conditions listed, one of which

was to "[t]ry to obtain Mrs. Nasuti's guaranty," were satisfied.

Nasuti then argues that because his wife Helene Nasuti's

guarantee was not obtained, the stock purchase agreement was

never fully approved.13

Plaintiffs respond that the purchase of the stock was

not conditioned upon such approvals being obtained, and that even

if satisfaction of the condition was a predicate to performance,

the condition was satisfied, excused or waived.

a. The condition was satisfied

In a bilateral contract, if a condition precedent is

not satisfied, the obligations of the non-performing party are

discharged. Francis Gerard Janson P.C. v. Frost, 618 A.2d 1003,

1006 (Pa. Super. Ct. 1993). The party alleging the breach of

contract bears the burden of proof that the condition was

satisfied. Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619

F.2d 1001, 1007-1008 (3d Cir. 1980) (applying Pennsylvania law).

Jeffrey McDermott testified at trial that in August 1994 he

received oral approval of the transaction without conditions from

Daniel Gallagher, an officer of Royal Bank. (Tr. 8/26/97 at

14 Plaintiffs also argue that the nowhere in the contractwas there any requirement that the approval be in writing.

15 The court recognizes that there was evidence that theapproval was subject to conditions. Plaintiffs also offered thetestimony of Daniel Gallagher, an officer of Royal Bank, whoexplained that at the loan committee meeting, the transaction wasapproved with added conditions, (Tr. 8/25/97 at 11-12), a letterfrom Gallagher to Weiner addressing the approval of thetransaction by Royal Bank, (Ex. P-32), and the minutes of theRoyal Bank loan committee's February 9, 1995 meeting, (Exs. P-13and P-14), to confirm that the Royal Bank loan committee"approved the request with the following added conditions" (Tr.8/25/97 at 11-12). It is not, of course, the job of the Court toweigh conflicting evidence, see Parkway Garage, 5 F.3d at 691,but only to determine whether the verdict is supported by atleast "that minimum quantum of evidence," see Dawson v. ChryslerCorp., 630 F.2d 950, 959 (3d Cir. 1980).

12

47).14 Further, the McDermotts' attorney who had negotiated the

transaction, Jack Weiner, Esquire, testified at trial that based

on his dealings with Royal Bank in this case it was his

understanding that Royal Bank had approved the transaction. (Tr.

8/22/97 at 194-95.)15 Based upon the evidence presented, the

Court concludes that there was sufficient evidence on the record

for a reasonable jury to find that the condition of prior

approval by Royal Bank was satisfied.

b. The condition was excused

i. Nasuti's misconduct impeded thesatisfaction of the condition

Nasuti argues that the minutes of the loan committee's

February 9, 1995 meeting imposed additional conditions precedent

to the agreement. Nasuti specifically points to the alleged

requirement that Nasuti's wife's personal guarantee be obtained.

First, plaintiffs argue that Mrs. Nasuti's personal guarantee was

not really a mandatory condition because the minutes stated only

13

that Royal Bank would "try to obtain Mrs. Nasuti's guarantee."

(Ex. P-13 (emphasis added).) Second, plaintiffs claim that even

if Helene Nasuti's personal guarantee was a condition precedent

which had not been satisfied, the reason it was not satisfied was

because defendant himself refused to cooperate by not obtaining

his wife's personal guarantee in "bad faith." Plaintiffs

contend that Nasuti's argument that this "condition" was not

satisfied is a mere pretext, and that the testimony showed that

Helene Nasuti routinely gave her personal guarantee in other

business transactions. Because, according to plaintiffs, her

failure to provide her personal guarantee in this instance was

due to Nasuti's bad faith, the condition was excused.

If a party acts to hinder the satisfaction of a

condition, the condition is excused. Restatement (Second) of

Contracts § 225 cmt. b (1979). In other words, where a party

claiming the condition has not been satisfied is the cause of the

non-occurrence, he or she may not claim the non-occurrence to his

or her advantage. Commonwealth Dep't of Transp. v. W.P.

Dickerson & Son, Inc., 400 A.2d 930, 932 (Pa. Commw. Ct. 1979);

Craig Coal Mining Co. v. Romani, 513 A.2d 437, 440 (Pa. Super.

Ct. 1986) (A party "may not, in fact, take advantage of an

insurmountable obstacle placed by himself in the path of another

party's adherence to the agreement."). See, e.g., In re Stroud

Ford, Inc., 190 B.R. 785, 787 (Bankr. M.D. Pa. 1995).

Helene Nasuti testified that, in fact, in the past she

had signed all the personal guarantees her husband asked her to

14

sign, (Tr. 8/26/97 at 90), that she had guaranteed debts for

other Party City franchises owned by her husband, (Tr. 8/26/97 at

95), and that just recently she had guaranteed lease payments of

$1.5 million for the Northeast Shopping Center (Ex. P-20). This

evidence was sufficient to support a reasonable jury's finding

that the condition was excused by Nasuti's hindrance of the

satisfaction of the condition.

ii. Nasuti accepted performance

Plaintiffs also argue that because Nasuti accepted part

performance under the Shareholder Agreement, any condition

precedent was excused. See Restatement (Second) of Contracts §

247 (acceptance of part performance excuses the subsequent non-

occurrence of a condition) (1979). Plaintiffs produced evidence

that Nasuti accepted the benefits of the management provision of

the Shareholder Agreement in the form of his monthly management

fee of $5,700. (Tr. 8/21/97 at 58, 73-82.). Therefore, the jury

was entitled to find that the conditions were excused by Nasuti's

acceptance of part performance.

c. The condition was waived

Further, plaintiffs explain that the condition was

waived by Nasuti's performance under the contract. "Contractual

provisions can be waived, expressly or impliedly." Black Top

Paving Co. v. Commonwealth of Pa. Dep't of Transp., 446 A.2d 774,

776 (Pa. Commw. Ct. 1983). These provisions may be waived by a

party's conduct "as long as the intent to waive may be reasonably

inferred." In re Imaging Equip. Servs., 143 B.R. 355, 359

15

(Bankr. W.D. Pa. 1992) (applying Pennsylvania law). Plaintiffs

offered evidence that Nasuti affirmatively undertook his

management obligations under the stock purchase agreement

immediately upon signing the agreement and, as pointed out above,

accepted payments for his services from the McDermott Group.

Plaintiffs also offered testimony that they relinquished

management of the store to Nasuti and that Nasuti began to manage

the store immediately following the execution of the agreement.

Once in charge of the store, Nasuti controlled inventory, budget,

and purchasing decisions; adjusted payroll and assuming hiring

and firing responsibilities; implemented his operating procedures

in the store; taught employees how to buy inventory; transferred

inventory between the store and other Party City stores owned by

Nasuti; visited the store regularly; prepared receipts for spring

inventory; attended meetings with Party City Corp.; attended

buying meetings on behalf of the McDermott Group; and opened bank

accounts in the name of "Party City King of Prussia" at the

address of Nasuti's management company. (Tr. 8/21/97 at 73-82;

8/22/97 at 32-36, 39, 40-47.) This evidence supports a finding

that because Nasuti undertook full and complete management of the

store after the signing of the stock purchase agreement, and

prior to Royal Bank formally consenting to the transfer of the

stock, Nasuti waived the condition of bank approval.

d. The condition was material

Nasuti, now armed with new post-trial counsel, raises

for the first time the argument that the condition of bank

16

approval was material and, therefore, it could not be waived.

Nasuti's current counsel argues that "since this is a legal issue

on which the jury would not pass in any event, that it is

preserved by Mr. Shragger's motion, which was an oral motion."

(Tr. 4/17/98 at 8.) Assuming that this was an issue for the

Court to decide, Nasuti, however, concedes that trial counsel did

not raise this particular argument in his Rule 50 motions made

either at the close of plaintiffs' case or at the close of all

the evidence. See Tr. 8/26/97 at 75-78; 211-215. "Since [a Rule

50(b)] motion is nothing more than a renewal of the earlier

motion made at the close of the presentation of evidence, it

cannot assert a ground that was not included in the earlier

motion." 9A Charles A. Wright & Arthur R. Miller, Federal

Practice and Procedure § 2537, at 345 (2d ed. 1994); Chemical

Leaman Tank Lines, Inc. v. Aetna Casualty and Sur. Co., 89 F.3d

976, 993 (3d Cir. 1996), cert. denied, 117 S.Ct. 485 (1996). See

also Williams v. Runyon, 130 F.3d 568, 571 (3d Cir. 1997)

("Under normal circumstances, a defendant's failure to raise an

issue in a Rule 50(a)(2) motion with sufficient specificity to

the plaintiffs on notice waives the defendant's right to raise

the issue in their Rule 50(b) motion."). Because Nasuti failed

to raise the issue of the materiality of the condition in his

Rule 50(a) and 50(b) motions, the issue was waived.

Assuming that the materiality of the condition was an

issue for the jury, plaintiffs argue that Nasuti waived this

argument when he failed to submit a jury instruction or object to

16 Federal Rule of Civil Procedure 51 provides:No party may assign as error the giving or the failureto give an instruction unless that party objectsthereto before the jury retires to consider itsverdict, stating distinctly the matter objected to andthe grounds for the objection.

Fed. R. Civ. P. 51. The Third Circuit has interpreted this rulestrictly. Ryder v. Westinghouse Elec. Corp., 128 F.3d 128, 135(3d Cir. 1997), cert. denied, 118 S.Ct. 1052 (1998).

The Court concludes that neither the jury lacked"adequate guidance on a fundamental question," nor would the"failure to consider the error . . . result in a fundamentalmiscarriage of justice." Failla v. City of Passaic, Nos. 96-5538, 96-5539, 96-5835, 1998 WL 272762, at *5 (3d Cir. May, 29,1998) (citing United States v. 564.54 Acres of Land, 576 F.2d983, 987 (3d Cir. 1978), rev'd on other grounds, 441 U.S. 506(1979). In the cases collected by the Third Circuit in 564.54Acres of Land to support this apparent exception to Rule 51, thetrial courts either gave the jury the equivalent of noinstruction on the law, or gave them a legally incorrectinstruction. See Ratay v. Lincoln Nat'l Life Ins. Co., 378 F.2d209 (3d Cir. 1967) (concluding that trial court instruction wasclearly erroneous because it incorrectly stated the burden ofproof in a fraud case); Wilson v. American Chain and Cable Co.,364 F.2d 558 (3d Cir. 1966) (concluding that trial courtcommitted a fundamental error when it failed to definesuperseding cause and distinguish it from concurrent cause in anegligence case where causation was a pivotal issue); Pritchardv. Liggett & Myers Tobacco Co., 350 F.2d 479, 486 (3d Cir.1965)(concluding that trial court in failed to correlate the lawto the facts when its instructions did not distinguish betweenthe two variations of the assumption of the risk defense,contributory negligence and misuse of product, in a case allegingbreach of an express warranty); McNello v. John B. Kelly, Inc.,283 F.2d 96, 102 (3d Cir. 1960) (concluding that a fundamentalerror had been committed where the trial court failed to instructthe jury on the law applied to the facts "the question ofliability . . . was submitted to the jury with what wastantamount to no instructions at all"); Mazer v. Lipschutz, 327

17

the absence of one on such grounds. See Def.'s Request for

Charge (doc. no. 96); Tr. 8/27/97 at 16-25. The Court agrees

that because Nasuti neither timely and appropriately raised the

issue at trial, nor objected to the jury instructions, the issue

of materiality of the conditions was waived and may not be

considered now on post trial motions. Fed. R. Civ. P. 51.16

F.2d 42, 52 (3d Cir. 1963) (concluding the failure to review alegally incorrect jury instruction would result in a miscarriageof justice). But see Trent v. Atlantic City Elec. Co., 334 F.2d847, 859 (3d Cir. 1964) (concluding that the court need notconsider the contested instruction because "the evidence was morethan sufficient to justify findings of negligence on [the jury's]part even under a more properly detailed charge."). In thiscase, Nasuti does not contend either that the Court failed togive the jury adequate guidance or that the Court gave an legallyincorrect instruction, but rather, the Court, did not include aninstruction that Nasuti failed to propose. Thus, the Courtconcludes that the exception to Rule 51 enunciated by the ThirdCircuit in Failla and 364.54 Acres is not applicable in thiscase.

18

In summary, on the contract claim, the Court agrees

that, in viewing the evidence in the light most favorable to the

prevailing party, and given the advantage of every fair and

reasonable inference to the prevailing party, plaintiffs showed

that the condition of bank approval was either satisfied,

excused, or waived.

2. Damages

Based on its finding that Nasuti breached a contract

between Nasuti and plaintiffs, the jury awarded plaintiffs

$376,489.49. Nasuti complains generally, that the jury award on

the contract claim exceeded plaintiff's expectation interest in

the contract, i.e. that the award is excessive in relation to

what plaintiffs would have received had the contract been

performed.

a. Nasuti's failure to pay cash for his share ofthe McDermott Group

Nasuti argues the because the jury's finding that he

was liable on the contract claim was improper, plaintiffs are not

entitled to collect the $56,409.49 awarded for Nasuti's failure

19

to pay cash for 51 percent of stock in the McDermott Group as

required by the stock purchase agreement. "Generally, a

breaching party is liable for damages that would naturally result

from the breach . . . ." Fort Washington Resources v. Tannen,

901 F. Supp. 932, 943 (E.D. Pa. 1995)(citing Ebasco Servs., Inc.

v. Pennsylvania Power & Light Co., 460 F. Supp. 163, 213 n.62

(E.D. Pa. 1978)). In this case, it is conceded by Nasuti that

this amount flows directly from the breach of the contract.

Because the jury concluded that Nasuti breached the agreement, it

was proper for the jury to conclude that an award of damages

flowing from the breach in the amount of $56,409.49 should be

awarded to plaintiffs.

b. Consequential damages

Further, Nasuti contends that the contract damage award

is excessive so as to constitute a windfall to plaintiffs that

"shocks the conscience" and which must be reduced. Specifically,

Nasuti argues that the jury's award for particular items, the

store lease, the balance on the loan by Royal Bank, and the

vendor debt, were improper in light of the well-settled rule that

consequential damages must have been reasonably foreseeable to be

compensable. Nasuti contends that the damages awarded flowed not

directly from the breach of the stock purchase agreement, but

from the McDermott's decision to liquidate the store prematurely

and that the decision to liquidate could not have been foreseen

by Nasuti at the time he entered into the contract with

plaintiffs.

20

Plaintiffs respond that Nasuti should have known that

the McDermotts would have to liquidate the store and accelerate

debt payments when he breached the agreement. They explain that

when Nasuti breached the contract, they were faced with two

options: "(1) continue to operate the store at [the King of

Prussia] location at which it was losing money . . . or (2) close

the store and curtail the losses they were sustaining." Pls.'

Mem. at 27. Plaintiffs essentially argue that they used their

best business judgment in deciding to liquidate the store. They

contend that, "Nasuti cannot be permitted to breach his contract

and second guess how the McDermotts tried to mitigate their

damages afterward." Id. Plaintiffs also contend that the

particular consequential damages they seek were also foreseeable,

and point to the stock purchase agreement under which Nasuti

agreed to indemnify plaintiffs for 51 percent of the debt to the

landlord, to Royal Bank, and to the vendors, and the fact that

Nasuti has made none of these payments.

The Court agrees with plaintiffs' arguments. First,

Pennsylvania law distinguishes "between general damages -- those

ordinary damages that flow directly from the breach; and special

or consequential damages -- those collateral losses, such as

expenses incurred or gains prevented which result from the

breach." Tannen, 901 F. Supp. at 943 (citing Ebasco, 460 F.

Supp. at 213 n.62 (E.D. Pa. 1978)). It is well-settled that to

recover consequential damages, plaintiff must show specifically

that defendant had reason to know of the special circumstances

21

causing the loss and that the injury was foreseeable. Id.;

Hadley v. Baxendale, 9 Exch. 341 (1854). Foreseeability is to be

determined from the point in time when the contract was formed.

Tannen, 901 F. Supp. at 943; Hazleton Area Sch. Dist. v. Bosak,

671 A.2d 277, 282 (Pa. Commw. Ct. 1996).

In this case, the Shareholder Agreement unambiguously

states:

Nasuti further agrees to indemnify, defend and hold[the McDermotts] harmless from and against any loss orliability exceeding , as to each such separateliability equal to the McDermott Share. In the eventany of such guarantees are called upon by therespective creditors of the [the McDermott Group], uponfunding of their share by [the McDermotts], Nasutishall immediately fund his share of the requiredpayment.

Ex. P-11 at para. 6. It is clear from the plain language of the

Shareholder Agreement that Nasuti agreed as part and parcel of

his obligation under the agreement to be responsible for 51

percent of the debts owed by the McDermott Group. The balance

owed to the vendors, to the landlord, and to Royal Bank are,

therefore, recoverable because they were foreseeable.

Nasuti next argues that plaintiffs have already

recovered for the loss on the lease, the loan, and the vendor

debt through plaintiffs' settlement with Party City Corp. in

which Party City Corp. directly paid the landlord, Royal Bank,

and the vendors for outstanding debts. Therefore, Nasuti argues,

to allow these claims in this case would constitute double

recovery. In essence, Nasuti contends that "a plaintiff may

obtain judgment against several [defendants] for the same harm,

22

[however] he or she is only entitled to one satisfaction of that

harm." Brandt v. Eagle, 602 A.2d 1364, 1367 (Pa. Super. Ct.) (en

banc), app. denied, 615 A.2d 1310 (Pa. 1992).

Plaintiffs reply that they are not seeking "double

recovery" from Party City Corp. and Nasuti, but that Party City

Corp. merely agreed to pay the about of the settlement directly

to the creditors rather than to them, in satisfaction of the

debts owed by the McDermotts and Nasuti collectively as part of

the McDermott Group. (Ex. P-38.)

The direct payment by Party City Corp. of the debts of

the McDermott Group did not affect Nasuti's duties to the

McDermotts. The two are completely unrelated. The McDermotts

and Party City Corp. structured the settlement inter se in a

manner that Party City Corp. was to pay the amounts owing

directly to the creditors, rather than having Party City Corp.

pay the McDermotts who would, in turn, pay the creditors. This

undoubtedly was done to accommodate Party City Corp.'s concern

that it not be subjected to potential liability by third parties

in the event that the McDermotts did not pay the creditors with

the monies received from the Party City Corp. settlement. In any

event, the McDermotts, albeit through payment by Party City Corp.

rather than directly, extinguished 100 percent of the debts owed

by the McDermott Group to creditors. Because under the

Shareholder Agreement, Nasuti must pay 51 percent of the

McDermott Group debt, the Court will uphold this portion of the

jury award.

23

b. Unforeseeable damages--the sale of the mutualfunds

Nasuti also contends that the jury's award of $17,500

for the tax and opportunity losses associated with the early

liquidation of the McDermotts' mutual funds to secure the

repayment of the loan to Royal Bank was improper. Plaintiffs

disagree, arguing that because Nasuti was provided all of the

Royal Bank loan documents, including those indicating that the

McDermotts had pledged the mutual funds as security, Nasuti could

have reasonably foreseen that the mutual funds would have to be

liquidated if he breached the stock purchase agreement.

The Court disagrees with plaintiff's theory of

foreseeability. As discussed above, foreseeability is to be

determined at the point in time when the contract was formed and

not at the time the contract was breached, i.e. were the

consequences reasonably contemplated by the parties at the time

the agreement was made, not when it was broken. Plaintiffs claim

that Nasuti knew that the mutual funds were pledged as security

and, thus, that fact was within the contemplation of the parties

at the time the agreement was entered. Mere knowledge of one of

the parties of a special situation, however, is not sufficient:

'Parties, when they enter into contracts, may well bepresumed to contemplate the ordinary and naturalincidences and consequences of performance or non-performance; but they are not supposed to know thecondition of each other's affairs, nor to take intoconsideration any existing or contemplated transactionsnot communicated or known, with other persons. Fewpersons would enter into contracts of any considerableextent as to subject matter or time if they shouldthereby incidentally assume responsibility of carryingout, or be legally held affected by other arrangement

17 Nasuti is no more responsible for the tax and lostopportunity costs associated with the voluntary sale of themutual funds than he would be for future appreciation of theMcDermott's two homes, which were also pledged as security forthe transaction, if the McDermotts had chosen to sell thesehouses rather than the mutual funds to raise cash to pay thedebt.

24

over which they have no control.'

Ebasco, 460 F. Supp. at 217 (quoting Macchia v. Megow, 50 A.2d

314, 316 (Pa. 1947) (quoting Sutherland on Damages § 47(4th

ed.))).

The claim for tax and opportunity losses is thus not

compensable. As Jeffery McDermott testified at trial, the mutual

funds were not liquidated by Royal Bank, but rather they were

sold by the McDermotts to raise cash to pay the Royal Bank debt

because they had no other liquid assets to draw from. (Tr.

8/25/97 at 227.) Therefore, the sale of the mutual funds did not

flow directly from the breach of the contract, but rather was the

result of the McDermotts' precarious financial situation at the

time that the loan was called.17

Therefore, the Court will affirm the jury's award of

contract damages in all respects except to reduce by $17,500 for

the liquidation of the mutual funds, resulting in a reduced

recovery under the contract claim of $358,989.49.

B. Tort

1. Liability

Plaintiffs allege that through self-dealing, including

writing checks to himself from a McDermott Group account,

transferring store inventory and personnel to his own Party City

18 Nasuti contends that the evidence presented to the juryto prove plaintiffs' claim for conversion must be disregarded inevaluating plaintiffs claim for breach of fiduciary duty,because the jury did not find for plaintiffs on the conversionclaim. The Court disagrees. Claims for breach of fiduciary dutyand conversion are distinct and have separate and discreteelements. The elements the plaintiff must prove in claim ofbreach of fiduciary duty are: "(1) that the defendant negligentlyor intentionally failed to act in good faith and solely for thebenefit of plaintiff in all matters for which he or she wasemployed; (2) that the plaintiff suffered injury; and (3) thatthe agent's failure to act solely for the plaintiff's benefit . .. was a real factor in bring about plaintiff's injuries," Pa.S.S.J.I. § 4.16 (1991). The elements of conversion are: (1) thedeprivation of another's right of property in, or use orpossession of, a chattel; (2) without the owner's consent; and(3) without lawful justification. See Bernhardt v. Needleman,705 A.2d 875, 878 (Pa. Super. Ct. 1997). See also UniversalPremium Acceptance Corp. v. York Bank and Trust Co., 69 F.3d 695,704 (3d Cir. 1995) (citing Cenna v. United States, 402 F.2d 168,170 (3d Cir. 1968)).

While a plaintiff may not recover twice based on the sameevidence on alternative theories, Trackers Raceway, Inc. v.

25

stores, usurping corporate opportunities, and then abandoning the

store without adequate notice, Nasuti converted McDermott Group

property and breached a fiduciary duty he owed the McDermott

Group. Nasuti challenges the jury's verdict for plaintiffs on

the breach of fiduciary duty claim, arguing that he did not owe

them a duty as a fiduciary, and that even if did, he never

breached that duty. In disputing the contention that there

existed a fiduciary relationship between him and plaintiffs,

Nasuti argues that the relationship between the parties was

defined by a written contract, negotiated at arms-length between

sophisticated parties, and that therefore no fiduciary duty was

established. Moreover, even if there were a duty, there was

insufficient evidence to support a finding that there was a

breach of any duty owed to plaintiffs by Nasuti.18

Comstock Agency, Inc., 583 A.2d 1193, 1196 (Pa. Super. Ct. 1990),it does not follow that plaintiffs who proceeds on alternativetheories based on the same type of evidence, cannot recover onone theory, i.e., breach of fiduciary duty, because the jury didnot find for plaintiffs on the alternative theory, i.e.,conversion.

26

Plaintiffs respond, to the contrary, that the evidence

overwhelmingly supports the conclusion that plaintiffs placed

their trust in the skill and experience of Nasuti and Brand, who

had many years experience in the retail goods business and who

owned and managed several apparently successful Party City

stores. Further, plaintiffs contend that the Shareholder

Agreement, which delegates management responsibilities to Nasuti,

expressly designated Nasuti as their agent. Therefore, they

argue, Nasuti, as the McDermott Group's agent, owed it "the

utmost duties of loyalty and good faith toward the McDermotts

with respect to the operation of the franchise." Pls.' Mem. at

22.

Under Pennsylvania law, "[a fiduciary] relationship

exists where one person has reposed a special confidence in

another to the extent that the parties do not deal with each

other on equal terms, either because of an overmastering

dominance on one side or weakness, dependence or justifiable

trust, on the other." Commonwealth Dep't of Transp. v. E-Z

Parks, 620 A.2d 712, 717 (Pa. Commw. Ct. 1993). "A business

association may be the basis of a confidential relationship 'only

if one party surrenders substantial control over some portion of

his [or her] affairs to the other." Id. (quoting In re Estate

19 The Restatement provides that "[u]nless otherwiseagreed, an agent is subject to a duty to his principal to actsolely for the benefit of the principal in all matters connectedwith his agency." Restatement (Second) of Agency § 387 (1958).

27

of Scott, 316 A.2d 883, 886 (Pa. 1974)). Further, when a person

authorizes another to act as his or her agent, the relationship

between the two may be characterized as a fiduciary relationship.

Sutliff v. Sutliff, 528 A.2d 1318, 1323 (Pa. 1987) (citing

Restatement (Second) of Agency § 387 (1958)19; Sylvester v. Beck,

178 A.2d 755 (Pa. 1962)); Garbish v. Malvern Fed. Sav. & Loan

Ass'n, 517 A.2d 547, 553-54 (Pa. Super. Ct. 1986). See also In

re Shahan, 631 A.2d 1298, 1303 (Pa. Super. Ct. 1993). "Under

Pennsylvania law, the duty of an agent to his principal is one of

loyalty in all matters affecting the subject of his agency and

'the agent must act with the utmost good faith in the furtherance

and advancement of the interests of his principal.'" Garbish, 517

A.2d at 553-54 (quoting Sylvester v. Beck, 178 A.2d 755 (Pa.

1962)). Because the terms of the agency relationship are spelled

out in a written agreement, it does not mean that the agent does

not also owe, as a matter of law, a duty of loyalty to the

principal. In other words, the contract between the parties may

serve to inform and define the agent's fiduciary duty imposed by

law. Thus, for example, an agent who embezzles from his

principal may be in breach of both the contract between the

parties which spelled out his authority and functions, as well as

the agent's duty imposed by operation of law.

As explained above, the evidence presented at trial was

28

sufficient to support a finding that Nasuti assumed management

and control of the store on behalf of the McDermott Group. After

Donna and Jeffrey McDermott moved to Virginia, they entrusted

Nasuti, whom they had selected by virtue of his management

expertise, to manage the day-to-day operation of the McDermott

Group business. The evidence showed that Nasuti acted as the

McDermott Group's agent, making almost all the business

decisions, and exercising full discretion on behalf of the

McDermott Group for purchasing, inventory, payroll, personnel

management, and negotiations with Party City Corp. and outside

vendors.

Further, plaintiffs offered evidence that Nasuti opened

a checking account in New Jersey, the location of Nasuti's

management company, in the name of "Party City King of Prussia."

(Tr. 8/21/97 at 79-81,) transferring funds from the store's

account in Nasuti wrote checks to himself drawn on this

account, which held funds from the McDermott Group store. The

McDermotts, who had no signature authority on the account, id.,

did not learn of its existence until after Nasuti repudiated the

agreement and abandoned his management duties at the McDermott

Group store, (id.; Tr. 8/25/97 at 63-64). Specifically, Nasuti

wrote a check to his personal attorney on October 11, 1994 for

$2,900. (Ex. P-27.) On March 6, 1995, Nasuti wrote a check to

himself for $10,000, one week before he "canceled the contract"

purportedly because the McDermotts failed to put more cash into

the business. (Ex. P-22.) Even after Nasuti's repudiation of

20 Plaintiffs further argue that Nasuti would benefit if healone had both the Cottman and Bustleton and Northeast ShoppingCenter stores, regardless of their proximity, because he would,inter alia, be able to transfer inventory and employees andcross-refer customers, and thus a synergy between the stores

29

the contract, he wrote several checks payable to himself on this

account, including, one on March 23, 1995 for $2,000, (Ex. P-23),

one on March 27, 1995, for $1,000, (Ex. P-24), and one on March

30, 1995 for $3,000, (Ex. P-21).

Nasuti also transferred the McDermott Group's store

manager, Tom Volpini, to other Party City stores owned by Nasuti

and his affiliates. Plaintiffs paid Volpini's salary, which

Brand reduced from $48,000 per year to $32,000 per year, (Tr.

8/22/97 at 40), from the McDermott Group account while Volpini

was working for Nasuti at his other stores for approximately

three months. (Tr. 8/25/97 at 164, 171-72.)

Plaintiffs also offered evidence, in the form of Party

City "Inter Store Transfer" sheets, that showed that Nasuti

transferred $15,747.61 worth of inventory from the store to other

stores, including stores he owned, without reimbursing the

McDermott Group. (Ex. P-66; Tr. 8/25/97 at 77).

Further, plaintiffs offered evidence that Nasuti acted

in his own interest when he suggested to the McDermotts that they

relocate the McDermott Group store to the Northeast Shopping

Center location, while in the meantime, unbeknownst to

plaintiffs, Nasuti was planning to open his own Party City store

approximately three miles away at the Cottman and Bustleton

Avenues location.20

would develop.

30

Lastly, plaintiffs offered evidence that Nasuti

"cancel[ed] the contract" without notice and abruptly left the

store. Based upon the evidence that Nasuti failed to provide

sufficient notice to allow the McDermott Group to make

alternative arrangements, and not making any efforts to keep the

business viable during the transition following his departure,

the jury could have reasonably concluded that Nasuti put his

interests ahead of the interests of the McDermotts.

In summary, the jury had sufficient evidence to

reasonably conclude that Nasuti, as a fiduciary, owed plaintiffs

the utmost duties of loyalty and good faith. Further, plaintiffs

offered sufficient evidence for a reasonable jury to find, that

through self-dealing, Nasuti breached these duties.

2. Damages

a. Compensatory damages

Nasuti argues that even assuming there was a breach of

fiduciary duty, there was no evidence to support an award of

damages. Plaintiffs respond that the $137,000 that the jury

awarded them was adequately based upon evidence that: (1) Nasuti

had paid himself from McDermott Group accounts in the amount of

$18,790; (2) Nasuti had transferred inventory to his other stores

for which he paid with McDermott Group funds in the amount of

$15,747.61; (3) Nasuti took other inventory for which there was

no records of inter-store transfers; (4) Nasuti transferred

McDermott Group Store Manager Tom Volpini to Nasuti's other Party

31

City stores while Volpini was being paid wages by the McDermott

Group ($8,000, representing three months at a salary of $32,000

per year); and (5) plaintiffs were deprived profits when Nasuti

impeded the relocation of the store from King of Prussia to the

Northeast Shopping Center location through his self dealing.

Nasuti also contends, that because the jury did not

find for plaintiffs on the conversion claim, it would be

inconsistent, and thus impermissible to award plaintiffs damages

on the breach of fiduciary duty claim, and that because the jury

did not award plaintiffs damages for lost profits under contract

theory, they could not do so under this tort claim.

Generally in tort claims, "a tortfeasor is liable for

all the damages which ordinarily and in the natural course of

things have resulted from the commission of the tort." Frank v.

Volkswagenwerk, A.G. of West Germany, 522 F.2d 321, 323 (3d Cir.

1975)(citing Hillsdale Coal & Coke Co. v. Pennsylvania R.R. Co.,

78 A. 28 (Pa. 1910)). Damages must be proven with reasonable

certainty. Delahanty v. First Pennsylvania Bank, N.A., 464 A.2d

1243, 1257 (Pa. Super. Ct. 1983)(internal citations omitted).

While mathematical certainty is not required, the plaintiff must

introduce sufficient facts upon which the jury can determine the

amount of damages without conjecture. Id.

As described above, plaintiffs presented evidence that

Nasuti wrote checks to himself drawn on McDermott Group accounts,

three of which he wrote even after he purportedly had repudiated

the agreement. Testimony was offered that Nasuti assigned Tom

21 For the reasons explained above, there is no reason whyplaintiff should be barred from recovering for the damagessuffered from the loss of injury because the jury did not findfor plaintiffs on the conversion claim. "Relief in thealternative or of several different types may be demanded." Fed.R. Civ. P. (8)(a). Therefore, when a plaintiff proceeds onalternative theories, a plaintiff is not precluded fromrecovering on one theory because the jury did not find for him orher on both.

32

Volpini, whose salary was reduced from $48,000 per year to

$32,000 per year, to stores owned by Nasuti for three months and

that Volpini was paid from McDermott Group funds. There was also

evidence in the form of a list of inter-store transfers,

including the invoice number, the inventory's origin, its

destination, and the value of the transfer, that Nasuti

transferred McDermott Group inventory to his own stores.21 (Ex.

P-66; Tr. 8/25/97 at 77). The jury, therefore, had sufficient

evidence upon which to award plaintiffs $42,537.61 for the losses

of these items.

The $94,462.39 constituting the balance of the award,

however, is not supported by the evidence. Plaintiffs argue that

the jury may have awarded this amount to compensate them for the

inventory that was missing upon physical inspection of the stock

for which there was no transfer sheets, and/or, the profits lost

by being prevented from continuing to operate the store at the

Northeast Shopping Center.

Plaintiffs offer the testimony of Stephen Cucinotti, an

experienced liquidator, who had been hired by the McDermotts to

liquidate the store. Cucinotti testified at trial that when he

compared the computer-generated inventory sheets to the store's

33

physical inventory, he found "significant discrepancies," i.e.

where there should have been ten items according to the inventory

sheets, upon physical inspection, only one or two were found.

(Tr. 8/22/97 at 65.) Neither Cucinotti's testimony, nor the

computer generated "Inventory Valuation Summary Report" (Ex. D-

145) he referred to in his testimony, were specific enough to

justify the jury's award. Further, Cucinotti did not testify

that he calculated the amount of the inventory missing. The

inventory valuation summary report only lists total values for

the inventory that was supposed to have existed in each store

department. The Court concludes that because it would be

impossible to reach a fair estimate of the amount of inventory

lost based on Cucinotti's testimony and the supporting document,

the evidence was not sufficient to support the jury's award

without conjecture. The Court therefore will not uphold that

aspect of the jury's award on this basis.

Alternatively, plaintiffs further that they were

entitled to the profits the McDermott store could have made if

plaintiffs were not forced to liquidated the franchise by

Nasuti's breach. Lost profits for a new business, however, are

generally not recoverable because "such damages are by nature

speculative and elude a reasonable certain estimation." Tannen,

901 F. Supp. 932. In other words, because a new business, by

definition, has not track record of earnings, projecting future

profits is a hazardous undertaking. Plaintiffs did not adduce

proofs which would allow the award on this basis. Because,

34

damages on this theory, are speculative, at best, and because no

proof of lost profits was presented no reasonable jury could

award damages for lost profits in this case.

For these reasons, the Court must reduce the jury's

award on the breach of fiduciary duty claim by $94,462.39, from

$137,000 to $42,537.61.

b. Punitive damages

Nasuti argues that the jury's punitive damage award was

not supported by the evidence, and that because it was nearly

three times the amount of compensatory damages awarded, is

excessive, and thus must be reduced. Nasuti further argues that

the loss to plaintiffs was purely economic, and Nasuti’s actions

were not outrageous or reprehensible so as to justify the

punitive damage award.

Plaintiffs respond that the size of the award was

appropriate because a lesser amount would not deter someone of

Nasuti’s wealth from taking similar actions, and thus would

defeat one of the purposes for punitive damages, to punish the

wrongdoer for committing the improper act and to deter others for

committing such an act in the future. Restatement (Second) of

Torts § 908 (1977); In re TMI, 67 F.3d 1119 (3d Cir. 1995);

Kirkbride v. Lisbon Contractors, Inc., 555 A.2d 800, 803 (Pa.

1989).

i. Nasuti's actions were sufficientlyoutrageous to support an award ofpunitive damages.

Under Pennsylvania law, the decision of whether to

22 The standard of proof for punitive damages underPennsylvania law is by a preponderance of the evidence. Spraguev. Walter, 656 A.2d 890, 923 (Pa. Super. Ct. 1995) (citingDiSalle v. P.G. Pub. Co., 544 A.2d 1345, 1372 (Pa. Super. Ct.1988).

35

award punitive damages and the scope of the damages are within

the discretion of the finder of fact.22 Donaldson v. Bernstein,

104 F.3d 547, 556-57 (3d Cir. 1997) (applying Pennsylvania law).

"Punitive damages are appropriate when the act committed, in

addition to causing actual damages, constitutes 'outrageous

conduct,' either through reckless indifference or bad motive."

Id. (citing McClellan v. Health Maintenance Org. of Pa., 604 A.2d

1053, 1061 (Pa. Super. Ct. 1992) and Feld v. Merriam, 485 A.2d

742, 474-48 (Pa. 1984) (adopting Restatement (Second) of Torts §

908(2)in Pennsylvania). Outrageous conduct "is defined as an act

which, in addition to creating 'actual damages, also imports

insult or outrage, and is committed with a view to oppress or is

done in contempt of plaintiffs' rights.' Klinger v. State Farm

Mut. Auto. Ins. Co., 115 F.3d 230, 235 (3d Cir. 1997) (quoting

Delahanty, 464 A.2d at 1263). To determine whether punitive

damages are appropriate the following factors may be considered:

(1) the character of the act; (2) the nature and extent of the

harm caused; and (3) the wealth of the defendant. Kirkbride, 555

A.2d at 803 (citing Restatement (Second) of Torts § 908(2)

(1978)). Further, in making the determination, "one must look to

the act itself together with all the circumstances including the

motive of the wrongdoers and the relations between the parties .

. . . The state of mind of the actor is vital. The act, or the

36

failure to act, must be intentional, reckless or malicious."

Feld v. Merriam, 485 A.2d 742, 747-48 (Pa. 1984), quoted by UGI

Corp. v. Piccione, No. 88-1125, 1997 WL 698011, *8 (E.D. Pa. Nov.

5, 1997)). Moreover, under Pennsylvania law, to award punitive

damages there must be conduct beyond that which supported the

compensatory damages award. Donaldson, 104 F.3d at 557 (citing

Smith v. Renaut, 564 A.2d 188, 193-94 (Pa. Super. Ct. 1989). In

other words, because the award of punitive damages is intended to

satisfy a public policy purpose beyond compensation to the

injured party, simply because the conduct of the tortfeasor is

actionable and has caused damages, the injured party is not

entitled to punitive damages. Further, a judge may not vacate a

jury's punitive damages award because he or she might have

awarded less. Sprague v. Walter, 656 A.2d. 890, 925 (Pa. Super.

Ct. 1995).

The jury's finding that plaintiffs had proven that

Nasuti acted in an outrageous manner, that is he acted with

intentional, reckless, or malicious disregard for plaintiffs'

interests was supported by the evidence. Plaintiffs produced

evidence that after Nasuti gained the McDermott's trust and

confidence, he acted in his own interest, paying himself and his

attorney from McDermott Group funds, taking inventory from the

McDermott Group for use in his own stores, and assigning a

McDermott Group employee to work in his store and paying him from

McDermott Group funds. Even after Nasuti let the McDermotts know

the Northeast Shopping Center location was available, he made the

37

choice problematic by choosing to open his own store

approximately three miles away. Once he decided to quit, Nasuti

executed a quick exit, without prior notice, on the pretext that

there was no contract between the parties. Thus, plaintiffs

offered evidence that Nasuti left them "high and dry" to his own

benefit. The jury, therefore, was within its discretion to find

the conduct to have been intentional, reckless, or malicious.

Before it may remit the damages, the Court must find

that the jury's award "shocks the court's sense of justice."

Kirkbride, 555 A.2d at 802-803. Considering the character of

Nasuti's actions, the nature and extent of the harm caused by

him, and in light of his wealth, there is nothing to indicate

that the jury's award "shocks the conscience." Therefore, the

Court has no basis to overturn the jury's award of punitive

damages.

ii. The award was not unconstitutionallyexcessive.

Nasuti contends that the jury's award of $375,000 is

impermissibly excessive when compared to the $137,000 the jury

awarded in compensatory damages. Nasuti relies on the recent

United States Supreme Court case of BMW of N. Am., Inc. v. Gore,

116 S. Ct. 1589 (1996), for the proposition that a punitive

damage award that is "grossly excessive" violates the

constitutional right to due process, and is, therefore,

impermissible. In response, plaintiffs argue that Nasuti’s

reliance on BMW is inappropriate in this particular case, because

in BMW, the punitive damages awarded were 500 times the amount of

38

compensatory damages awarded, while in this case the ratio is

only 3 to 1.

The Court must decide whether the award was excessive

under either or both Pennsylvania or federal law. First, the

Pennsylvania Supreme Court has held that under Pennsylvania law

there is no proportionality required between the amount of

consequential damages and the amount of punitive damages awarded.

Kirkbride v. Lisbon Contractors, Inc., 555 A.2d 800 (Pa. 1989).

The Pennsylvania Superior Court explained the rationale of the

Kirkbride decision thus:

Under Pennsylvania law, punitive damages need bear noproportional relationship to the compensatory damagesawarded in a particular case. Rather, a reasonablerelationship must exist between the amount of thepunitive damage award and the twin goals of punishmentand deterrence, the character of the tortious act, thenature and extent of the harm suffered by theplaintiff, and the wealth of the defendant. Our SupremeCourt has ruled that a mathematical proportionalityrequirement between punitive and compensatory damageswould actually defeat the purpose of punitive damages,which is to punish tortfeasors for outrageous conductand deter them and others from similar conduct.

Sprague, 656 A.2d at 925 (citing Kirkbride, 555 A.2d at 803-804).

While "mathematical certainty" is not required, Delahanty, 464

A.2d at 1257, "a reasonable relationship must still exist between

the nature of the cause of action underlying the compensatory

award and the decision to grant punitive damages." Sprague, 656

A.2d at 925. Further, the wealth of the defendant is an

appropriate factor for the finder of fact to consider. Sprague,

656 A.2d at 925 (citing Kirkbride, 555 A.2d at 803).

Finding no defect in the jury's award under

39

Pennsylvania law, the Court must turn to the question of whether

the punitive damage award was so excessive as to violate due

process under federal law. The United States Supreme Court, in

BMW, explained that "[e]lementary notions of fairness enshrined

in our constitutional jurisprudence dictate that a person receive

fair notice nor only of the conduct that will subject him to

punishment but also of the severity of the penalty a state may

impose," BMW, 116 S.Ct. at 1598. The Supreme Court set forth

three "guideposts" to aid in the determination whether a

particular punitive damage award is "grossly excessive," and

therefore violates due process. Id. These guideposts are: (1)

the degree of reprehensibility of defendant's conduct, (2) the

ratio of the punitive damage award to the actual harm inflicted

on the plaintiff, and (3) a comparison of civil and criminal

sanctions for comparable conduct. Id. at 1599-1603.

Nasuti argues that the evidence did not support the

jury's finding that his actions were sufficiently reprehensible

to justify an award of punitive damages. According to the

Supreme Court, this factor is "the most important indicium of the

reasonableness of a punitive damages award . . . .", and trickery

or deceit are considered indicative of reprehensible conduct.

Id., at 1599.

In this case, jury found that Nasuti breached the

fiduciary duty he owed the McDermotts. While the McDermotts were

sophisticated in terms of their knowledge and experience in

business generally, they retained Nasuti precisely because of his

23 In Kirkbride, the Pennsylvania Supreme Court held that:If the purpose of punitive damages is to punish atortfeasor for outrageous conduct and to deter him or

40

recognized knowledge and expertise in the party goods industry.

Having thus obtained the confidence of the McDermotts, Nasuti

proceeded to operate for his own benefit without regard to the

McDermott's interests. Once detection of Nasuti's perfidy became

inevitable because of the poor performance of the store, Nasuti

fabricated a pretext that there had never been any contract.

Therefore, the jury was entitled to conclude that, having been

anointed by the McDermotts as "captain of their [business] ship,"

Nasuti abandoned it, without notice and in the middle of a

financial storm, under the thinly veiled pretext that there had

never been a contract at all.

Nasuti further argues that the amount of punitive

damages awarded was out of proportion to the actual loss caused

by the breach. However, in BMW, the Supreme Court rejected the

notion that there exists "a mathematical bright line between

constitutionally acceptable and constitutionally unacceptable

that would fit every case." Id. at 1602 (quoting TXO Prod. Corp.

v. Allied Resources Corp., 509 U.S. 443, 458 (1933) and Pacific

Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 18 (1991). Rather, the

Supreme Court held that "[a] general concern of reasonableness .

. . properly enter[s] into the constitutional calculus." Id.

Nor is Nasuti's argument that the punitive damage award be

mathematically proportional to the compensatory damages awarded

consistent with Pennsylvania law.23 Kirkbride, 555 A.2d at 803.

others from similar conduct, then a requirement ofproportionality defeats that purpose. It is for thisreason that the wealth of the tortfeasor is relevant.In making its determination, the jury has the functionof weighing the conduct of the tortfeasor against theamount of damages which would deter such futureconduct. In performing this duty, the jury must weighthe intended harm against the tortfeasor's wealth. Ifwe were to adopt [a theory of proportionality],outrageous conduct, which only by luck results innominal damages, would not be deterred and the solepurpose of a punitive damage award would be frustrated.If the resulting punishment is relatively small whencompared to the potential reward of his actions, itmight then be feasible for a tortfeasor to attempt thesame outrageous conduct a second time. If the amountof punitive damages must bear a reasonable relationshipto the injury suffered, then those damages probablywould not serve as a deterrent. It becomes clear thatrequiring punitive damages to be reasonably related tocompensatory damages would not only usurp the jury'sfunction of weighing the factors set forth in Section908 of the Restatement (Second) of Torts, but wouldalso prohibit victims of malicious conduct, whofortuitously were not harmed, from deterring futureattacks.

Kirkbride, 555 A.2d at 803 (quoted by G.J.D. and D.K. v. Johnson,669 A.2d 378, 382 (Pa. Super. Ct. 1995)).

41

In this case, the amount of the punitive award, $375,000, is less

than nine times the reduced amount of compensatory damages under

the tort claim, $42,537.61.

In BMW, the Supreme Court commented that "[i]n most

cases, the ratio will be well within a constitutionally

acceptable range, and remittitur will not be justified on this

bases. When the ratio is a breathtaking 500 to 1, however, the

award must surely 'raise a judicial eyebrow.'" BMW, 116 S.Ct. at

1603 (quoting TXO, 509 U.S. at 482 (O'Connor, J., dissenting).

In Haslip, the Court concluded that a ratio of four to one did

not "'cross the line into the area of constitutional

42

impropriety.'" BMW, 116 S.Ct. at 1602 (quoting Haslip, 449 U.S.

at 23-24; and in TXO the Court suggested that even if a punitive

damage award was as high as 10 times compensatory damage award,

the due process clause would not be violated, id. Because the

ratio in this case, 8 to 1, does not approach the ratios other

courts have found to "raise a judicial eyebrow," or "'jar one's

constitutional sensibilities,'" TXO, 509 U.S. at 462 (quoting

Haslip, 499 U.S. at 18), 482, the Court concludes that the ratio

in this case is not constitutionally impermissible.

Lastly, the Court must "compar[e] the punitive damages

award and the civil or criminal penalties that could be imposed

for comparable misconduct . . ." BMW, at 1603. The Court

concludes that this last test is satisfied because Nasuti's

conduct could be considered criminal under Pennsylvania law, see

Forgery and Fraudulent Practices, 18 Pa. Cons. Stat. ch. 41, and

Theft by Deception, 18 Pa. Cons. Stat. § 3922, and could subject

him to a term of incarceration and fines up to twice the amount

he gained by his conduct. Further, under Pennsylvania law,

fraudulent business practices are subject to civil penalties up

to three times the actual damages sustained plus additional

relief a court may deem proper and costs and fees. See 73 Pa.

Stat. § 201-1 et seq.

Upon consideration of the BMW guideposts, the Court

concludes that the punitive damage award in this case is not

"grossly excessive" and will permit the jury's award to stand.

C. Prejudgment Interest

43

1. Breach of contract

Prejudgment interest is a matter of right in breach of

contract cases. Spang & Co. v. USX Corp., 599 A.2d 978, 983 (Pa.

Super. Ct. (1991) (citing Fernandez v. Levin, 548 A.2d 1191, 1193

(Pa. 1988)). "That right to interest begins at the time payment

is withheld after it has been the duty of the debtor to make such

payment." Fernandez, 548 A.2d at 1193. Under Pennsylvania law,

unless otherwise specified by the parties, the rate of

prejudgment interest is calculated as simple interest at a rate

of six percent per year. Pa. Stat. Ann. tit. 41, § 202 (1991);

Spang, 599 A.2d at 984. In this case, the Court has concluded

that the jury's award of should be reduced to $358,989.49. Of

this amount, $56,409.49 was awarded as the purchase price of the

stock and $302,580.00 was awarded for Nasuti's share (51 percent)

of the landlord debt, the vendor debt, and the debt to Royal

Bank. Thus, as to the landlord debt, the vendor debt, and the

Royal Bank debt, plaintiffs are entitled to $44,660.81,

representing six percent interest on $302,580.00 from the time

the contract was breached, March 13, 1995, until the time

judgement was entered, August 28, 1997 (2.46 years). As to the

amount owed plaintiffs for the purchase price of the stock, the

applicable rate of interest is governed by the terms of the

Promissory Note. (Ex. P-10.) According to the Promissory Note,

interest shall accrue at the prime rate. (Ex. P-10.)

Plaintiffs, therefore, are entitled to $14,447.65 in prejudgment

interest, representing interest at prime rate on $56,409.49 from

44

August 30, 1994, the date the Promissory Note was executed, to

August 28, 1997, the date of judgment. See Pls.' Mem. to Add

Prejudgment Interest, Ex. B.

2. Breach of fiduciary duty

Generally, it is within the discretion of the Court to

award prejudgment interest with regard to unliquidated sums, such

as that for breach of fiduciary duty. See Ambromovage v. United

Mine Workers of Am., 726 F.2d 972, 981 (3d Cir. 1984); Sack v.

Feinman, 413 A.2d 1059, 1063-65 (Pa. 1980). Under Pennsylvania

law, prejudgment interest is available for awards for breach of

fiduciary duty. Sack, 413 A.2d at 1065 ("Whenever the defendant

holds money or property that belongs in good conscience to the

plaintiff, and the objective of the court is to force

disgorgement of his unjust enrichment, interest upon the funds or

property so held may be necessary to force complete

restitution.") As discussed above, see supra at pp. 26-32,

Nasuti breached the fiduciary duty he owed plaintiffs. Further,

the Court calculated the damages awarded to plaintiffs by

evaluating the evidence supporting specific amounts Nasuti

improperly took from plaintiff. Therefore plaintiffs are

entitled to $6,278.55, representing six percent simple interest

per year on $42,537.61 from the time the duty was breached until

the date of judgement.

In this case, the jury found that Nasuti breached a

contract with, and fiduciary duty owed to, plaintiffs. Further,

Nasuti has failed to provide any specific reason why it would be

45

inequitable to award prejudgment interest on plaintiffs' award.

The Court, therefore, will add $65,387.01 in prejudgment interest

to the total amount awarded plaintiffs.

IV. CONCLUSION

For the reasons stated above, the Court will vacate the

jury award for the breach of contract and enter an amended

judgment in favor of plaintiffs for $841,914.11, representing

$776,527.10 in the principal award and $65,387.01 in prejudgment

interest.

An appropriate order follows.

IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

JEFFREY MCDERMOTT, : CIVIL ACTIONDONNA MCDERMOTT, and : NO. 95-3683MCDERMOTT GROUP, INC., :

:Plaintiffs, :

:v. :

:PARTY CITY CORP. and :PHILIP NASUTI, :

:Defendants. :

ORDER

AND NOW, this day of June, 1998, upon

consideration of defendant's motion for judgment as a matter of

law, or in the alternative for a new trial (doc. no. 136),

plaintiffs' responses (doc. nos. 137, 139), and defendant's reply

(doc. no. 138), plaintiffs' motion to amend judgment to add

prejudgment interest (doc. no. 114), defendant's response (doc.

no. 117), after oral argument, and for the reasons stated in the

Memorandum accompanying this Order, it is hereby ORDERED as

follows:

1. As to docket no. 116-1, defendant's motion for

judgment as a matter of law is GRANTED IN PART and DENIED IN

PART;

2. As to docket no. 116-3, defendant's motion for a

new trial is DENIED;

3. As to docket no. 116-2, defendant's motion for

remittitur is DENIED;

4. As to docket no. 114, plaintiff's motion for

3

prejudgment interest is GRANTED; and

5. An AMENDED JUDGMENT shall be ENTERED in favor of

plaintiffs and against defendant in the amount of $841,914.11.

AND IT IS SO ORDERED.

EDUARDO C. ROBRENO, J.